The Impact of Competition on Bank Orientation and Specialization
43 Pages Posted: 16 Feb 2004
Date Written: January 2004
How do banks react to increased interbank competition? Recent banking theory offers conflicting predictions about the impact of competition on bank orientation - i.e., the choice of relationship based versus transactional banking - and bank industry specialization. We empirically investigate the impact of interbank competition on bank branch orientation and specialization. We employ a unique data set containing detailed information on bank-firm relationships and industry classification. We find that bank branches facing stiff local competition engage relatively more in relationship-based lending but specialize somewhat less in a particular industry. Our results illustrate that competition and relationships are not necessarily inimical.
Keywords: bank orientation, bank industry specialization, competition, lending relationships.
JEL Classification: G21, L11, L14
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